Todd Ossenfort has been chief operating officer for Pioneer Credit Counseling since 1998. He writes our weekly “The Credit Guy” column, answering reader questions about credit counseling and debt issues.
Dear Credit Guy,
I bought a car for $15,000 and my interest rate runs me 18 percent. I didn’t think it was that bad because I am a first-time buyer. I am wondering what is the best way to drop that interest rate FAST? — Trey
I noticed from your e-mail address that you are with the U.S. Army. Thank you for your service! Depending on your circumstances, you may qualify for protections under the Servicemembers Civil Relief Act (SCRA). Under this revised law, service members are entitled to a reduction on the interest rates charged for loans that were initiated before the service member began active duty in the military.
So, if you were called to active duty from a reserve unit and you acquired the car loan before you were called up, your loan would qualify under the Act for interest rate reduction. The SCRA requires lenders to reduce the interest rates for loans to a maximum of 6 percent while the service member is on active duty. You would need to send the creditor written notice that you are on active duty and include copies of your orders. You only qualify for the interest reduction while serving on active duty. Once your status changes, you will need to notify the creditor.
If the above doesn’t apply, then please read on. I am curious as to why you want the interest rate to drop “FAST.” I hope you are not in a crisis situation, and that you didn’t knowingly enter into a loan with a monthly payment that you cannot afford. Is it that your financial situation has changed since you initiated the loan and you can no longer afford the payment? Maybe you just don’t want to pay that much in interest charges, which would be prudent on your part. Depending on your situation, your options may be somewhat limited.
Unfortunately, with auto loans it is very easy to get upside down (owe more than the car is worth) very quickly — particularly with a high interest rate on the loan and a minimal down payment. When upside down in a loan it is difficult to refinance the loan to lower your interest rate because you need to borrow more than the collateral (the car) is worth.
Additionally, selling the car is difficult for the same reason. However, selling the car for a loss and then paying the lender the difference in the sales price and the loan balance is better than a voluntary repossession. When a car is repossessed it is sold at auction for only a fraction of its value and the former owner, which in this case would be you, is responsible for paying the difference in the auction price and the loan balance, which can be quite high.
Now that you have the bad news, the good news is if you made a decent down payment on the car loan and your credit history has improved since you purchased the car, you may qualify for a loan with a more reasonable interest rate. I would recommend starting with your local military credit union where you will likely get the best rates and terms. If you can demonstrate a consistent payment history of 6 to 12 months this should help get you a lower interest rate than the current 18 percent you are being charged. Shopping online for a loan is another option that you could pursue to secure a lower interest rate loan.
As of September 2008, the current going rate for a used-car loan for someone with good credit is around 7 percent. Going from an 18 percent loan to a 7 percent loan would save you a huge amount over the life of the loan. You didn’t mention the length of the loan you have, so let’s take a look at the differences for three-year, four-year and five-year loans:
|Monthly savings from a lower interest rate on a $15,000 car loan|
|3-year loan||4-year loan||5-year loan|
|Monthly payment at 18%||$542||$441||$381|
|Monthly payment at 7%||$463||$359||$297|
|Total interest savings, life of loan||$2,849||$3,909||$7,572|
You might also try trading in the car at a dealership for another vehicle. Many dealerships will accept your trade for the loan balance even though it is not worth that much. If you go this route, make sure you can afford the new vehicle and accompanying loan!
Take care of your credit!
See related:Law eases debt burden for active military
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